Law Professors Ask Congress to Delay Changes in Debt Law

By Liz Moyer

Dec. 8, 2015

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Caesars Entertainment has labored under a mountain of debt since it was acquired by private equity firms in 2008.CreditCreditJulie Jacobson/Associated Press

Eighteen law professors sent a letter to leaders on Capitol Hill on Tuesday urging them to postpone proposed changes to a Depression-era law that they say could have “broad negative unintended consequences in the securities markets.”

The changes, added to omnibus spending legislation, would make it harder for some bondholders to challenge out-of-court debt restructuring deals such as the one for the casino operator Caesars Entertainment.

Critics of the amendment to the Trust Indenture Act of 1939 say it would hand a victory to big private equity firms at the expense of some bondholders.

Caesars is owned by Apollo Global Management and other firms. Six other restructuring deals could also be affected by a change in the law, including the one at Education Management Corporation, a for-profit college operator backed by Kohlberg Kravis Roberts & Company.

Recent federal court decisions favored minority bondholders. But opponents say those court rulings, which they are appealing, create incentives for companies to seek bankruptcy court protection rather than negotiate a restructuring out of court. The proposed changes would undo the court decisions, prompting an outcry from minority bondholders of Caesars Entertainment and Education Management Corporation.

Senator Harry Reid, the Nevada Democrat and minority leader who has been leading the effort, defended the amendment at a news conference on Tuesday.

“It doesn’t apply to Caesars; it applies to everyone,” Mr. Reid said. It’s “the bankruptcy law that’s been a part of this country for 90 years.”

Kenneth N. Klee, a professor emeritus at the University of California, Los Angeles, law school and a consultant to lobbyists on the Trust Indenture Act, said: “The primary objection being made by those opposed to this amendment is that Congress needs to hold extensive hearings. But this is just a correction to a recent misinterpretation of the statute – not a wholesale revision of the Trust Indenture Act.”

The professors’ letter was sent to Mr. Reid, Senator Mitch McConnell, the majority leader; Representative Paul D. Ryan, the speaker of the House; and Representative Nancy Pelosi, the House minority leader.

The professors, led by Adam J. Levitin of Georgetown, ask Congress to hold off changing the Trust Indenture Act until the issue can be considered in hearings and through public comment.

“As corporate finance law experts who teach and write about the Trust Indenture Act, we have differing opinions about whether the Trust Indenture Act should be amended, and if so, how,” the letter says. “We agree, however, that any amendment of the Trust Indenture Act should take place only after legislative hearings and the opportunity for public comment.”

Mr. Klee disagreed, saying, “Congress routinely adopts clarifying amendments to important statutes without undertaking the extensive work that would be involved in a rewrite of those statutes, and that’s all that’s happening here.”